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2016 Financial Report of the United States Government


United States Government Required Supplementary Information (Unaudited) For the Years Ended September 30, 2016, and 2015

Railroad Retirement, Black Lung, and Unemployment Insurance

Railroad Retirement

The Railroad Retirement Board (RRB) was created in the 1930s to establish a retirement benefit program for the Nation’s railroad workers. As the Social Security Program legislated in 1935 would not give railroad workers credit for service performed prior to 1937, legislation was enacted in 1934, 1935, and 1937 (collectively the Railroad Retirement Acts of the 1930s) to establish a railroad retirement program separate from the Social Security Program.

Railroad retirement pays full retirement annuities at age 60 to railroad workers with 30 years of service. The program pays disability annuities based on total or occupational disability. It also pays annuities to spouses, divorced spouses, widow(er)s, remarried widow(er)s, surviving divorced spouses, children, and parents of deceased railroad workers. Medicare covers qualified railroad retirement beneficiaries in the same way as it does Social Security beneficiaries.

Payroll taxes paid by railroad employers and their employees provide a primary source of income for the Railroad Retirement and Survivors’ Benefit Program. By law, railroad retirement taxes are coordinated with Social Security taxes. Employees and employers pay Tier I taxes at the same rate as Social Security taxes. Tier II taxes finance railroad retirement benefit payments that are higher than Social Security levels.

Other sources of program income include: the RRB-SSA-CMS Financial Interchanges with the Social Security and Medicare Trust Funds, earnings on investments, federal income taxes on railroad retirement benefits, and appropriations (provided after 1974 as part of a phase out of certain vested dual benefits). See Note 22—Social Insurance, for additional information on railroad retirement program financing.

Amounts in the Railroad Retirement Account and the SSEB Account that are not needed to pay current benefits and administrative expenses may be transferred to the NRRIT or used to offset transfers from the NRRIT to the Railroad Retirement Account. The NRRIT’s sole purpose is to manage and invest railroad retirement assets. NRRIT’s Board of Trustees is empowered to invest trust assets in nongovernmental assets, such as equities and debt, as well as in Government securities.

Since its inception, NRRIT has received $21.3 billion from RRB (including $19.2 billion in fiscal year 2003, pursuant to RRSIA) and returned $19.2 billion. During fiscal year 2016, the NRRIT made net transfers of $1.4 billion to the RRB to pay retirement benefits. Administrative expenses of the trust are paid out of trust assets. The balance as of September 30, 2016, and 2015, of non-federal securities and investments of the NRRIT are disclosed in Note 7—Debt and Equity Securities.

Cash Flow Projections

Economic and Demographic Assumptions. The economic and demographic assumptions used for the most recent set of projections are shown in the “Railroad Retirement” section of Note 22—Social Insurance.

Income and Expenditures. Chart 11 shows, in dollars, estimated railroad retirement income (excluding interest and financial interchange income) and expenditures for the period 2016-2090 based on the intermediate set of assumptions used in the RRB’s actuarial valuation of the program. The estimates are for the open-group population, which includes all persons projected to participate in the Railroad Retirement Program as railroad workers or beneficiaries during the period. Thus, the estimates include payments from, and on behalf of, those who are projected to be employed by the railroads during the period as well as those already employed at the beginning of the period. They also include expenditures made to, and on behalf of, such workers during that period.

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Source: Railroad Retirement Board

As Chart 11 shows, expenditures are expected to exceed tax income for the entire projection period. The imbalance generally grows at a moderate amount until about 2083 when it begins to grow a little more rapidly.

Income and Expenditures as a Percent of Taxable Payroll. Chart 12 shows estimated expenditures and income as a percent of Tier II taxable payroll. Expenditures as a percentage of payroll range between 67 percent and 71 percent through 2057, after which the percentage decreases until reaching 52 percent in 2085 through 2090. This is largely due to the anticipated decline in the number of annuitants per full-time employee.

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Source: Railroad Retirement Board

Sensitivity Analysis. Actual future income from railroad payroll taxes and other sources and actual future expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors as mentioned above. Two crucial assumptions are employment growth and the interest rate. The interest rate assumption reflects the expected rate of return on NRRIT investments. Table 7 shows the sensitivity of the shortfall in the Railroad Retirement Program to variations in these two assumptions. Note that beginning in fiscal year 2016, the present values are on a fiscal year basis, as of October 1. In the past, present values were on a calendar year basis, as of January 1. The low-cost employment scenario has a 7.1 percent smaller shortfall of income to expenditures, and the high-cost scenario has a 7.6 percent higher shortfall. A higher discount rate reduces future values relative to a lower rate. As seen in the table, the shortfall is 27.0 percent lower if the interest rate is 10.0 percent rather than 7.0 percent and 69.9 percent higher when the interest rate is 4.0 percent rather than 7.0 percent.

Table 7
Present Values of Railroad Retirement Expenditures in Excess of Income Under Various Employment and Interest Rate Assumptions, 2016-2090

(Dollar values in billions; values of assumptions shown in parentheses)
Assumption Low Middle High
Employment1 98.6
(-0.5%)
106.1
(-2.0%)
114.2
(-3.5%)
Interest rate 77.5
(10.0%)
106.1
(7.0%)
180.3
(4.0%)

1The low and middle employment scenarios have passenger service employment remaining at 46,000 workers per year and the remaining employment base declining at 0.5 percent and 2.0 percent, respectively, for 25 years, at a reducing rate over the next 25 years, and remaining level thereafter. The high-cost scenario has passenger service employment declining by 500 workers per year until a level of 35,000 is reached with the remaining employment base declining by 3.5 percent per year for 25 years, at a reducing rate over the next 25 years, and remaining level thereafter.

Source: Railroad Retirement Board.

Sustainability of Railroad Retirement

Table 8 shows the magnitudes of the primary expenditures and sources of financing for the Railroad Retirement Program computed on an open-group basis for the next 75 years and expressed in present values as of October 1, 2015. The data are consistent with the Statements of Social Insurance.

From a governmentwide perspective, revenues are expected to fall short of expenditures by approximately $106.1 billion, which represents the present value of resources needed to sustain the Railroad Retirement Program. From a trust fund perspective, when the trust fund balance and the financial interchange and transfers are included, the combined balance of the NRRIT, the Railroad Retirement Account, and the SSEB Account show a slight surplus.

Table 8
Present Values of 75-Year Projections of Revenues and Expenditures for the Railroad Retirement Program
1, 2
(In billions of present-value dollars as of October 1, 2015)
Estimated future income (excluding interest) received from or on behalf of:3
Current participants who have attained retirement age 8.4
Current participants not yet having attained retirement age 73.1
Those expected to become participants 72.8
All participants 154.3
 
Estimated future expenditures:4
Current participants who have attained retirement age 131.2
Current participants not yet having attained retirement age 99.0
Those expected to become participants 30.2
All participants 260.4
 
Net obligations from budget perspective (expenditures less income) 106.1
 
Railroad retirement program assets (mostly investments stated at market)5 26.3
 
Financial interchange from Social Security Trust 81.5
 
Net obligations from trust fund perspective (1.7)
 

1 Represents combined values for the Railroad Retirement Account, SSEB Account, and NRRIT, based on middle employment assumption.
2The data used reflect the provisions of RRSIA of 2001.
3Future income (excluding interest) includes Tier I taxes, Tier II taxes, and income taxes on benefits.
4Future expenditures include benefits and administrative expenditures.
5The value of the fund reflects the 7.0 percent interest rate assumption. The RRB uses the relatively high rate due to investments in private securities.

Note:Totals may not equal the sum of components due to rounding. Employee and beneficiary status are determined as of 1/1/2015, whereas present values are as of 10/1/2015.

Source: Railroad Retirement Board

Black Lung

The Federal Coal Mine Health and Safety Act of 1969 created the Black Lung Disability Benefit Program to provide compensation, medical, and survivor benefits for eligible coal miners who are totally disabled due to pneumoconiosis (black lung disease) arising out of their coal mine employment and to eligible survivors of coal miners who died due to pneumoconiosis. DOL operates the Black Lung Disability Benefit Program. Prior to fiscal year 2016, the beneficiary population was assumed to be a nearly closed universe in which attrition by death exceeds new entrants by a ratio of more than ten to one. During fiscal year 2016, the number of participants who joined the rolls increased due to, among other things, adjudicated liability as a result of responsible mine operator (RMO) bankruptcy.

Excise taxes on coal mine operators, based on the domestic sale of coal, are the primary source of financing black lung disability payments and related administrative costs. The Black Lung Benefits Revenue Act provided for repayable advances to the BLDTF from the General Fund, in the event that BLDTF resources were not adequate to meet program obligations. Prior to legislation enacted in 2008 that allowed for the restructuring of BLDTF debt, the trust fund had accumulated large liabilities from significant and growing shortfalls of excise taxes relative to benefit payments and interest expenses.

The Energy Improvement and Extension Act of 2008 (Public Law 110-343), enacted on October 3, 2008, contained several provisions that significantly improved the BLDTF’s financial position, including:

  • Continuation of a previously-enacted increase in coal excise tax rates for an additional 5 years, through December 2018;
  • Provision for the restructuring of BLDTF debt by refinancing the outstanding repayable advances with proceeds from issuing new debt instruments with lower interest rates; and
  • Establishment of a one-time appropriation that significantly reduced the outstanding debt of the BLDTF.

This Act also allowed that any debt issued by the BLDTF subsequent to the refinancing may be used to make benefit payments, other authorized expenditures, or to repay debt and interest from the initial refinancing. All debt issued by the BLDTF was effected as borrowing from the Treasury’s Bureau of the Fiscal Service.

On September 30, 2016, total liabilities of the BLDTF exceeded assets by $5.6 billion. This net position represents the accumulated shortfall of excise taxes necessary to meet benefit payments, administrative costs, and interest expense incurred prior to and subsequent to the debt refinancing pursuant to P.L. 110-343. Prior to the enactment of Public Law 110-343, this shortfall was funded by repayable advances to the BLDTF, which were repayable with interest. Pursuant to Public Law 110-343, these repayable advances were restructured as zero coupon bonds and any future shortfall is financed with one-year borrowing from Treasury. Outstanding debt at September 30, 2016 was $5.7 billion, bearing interest rates ranging from 0.589% to 4.556%. Excise tax revenues of $439.6 million, benefit payment expense of $122.8 million, and interest expense of $213.7 million were recognized for the year ended September 30, 2016. The interest expense is accrued and capitalized to the principal of the debt until the debt reaches its face value at the time of maturity. On September 30, 2016, the BLDTF issued debt in the amount of $910.0 million, bearing interest at 0.589% and maturing on September 30, 2017. At September 30, 2016, there were 25 debt instruments with staggered maturities of September 30 for years 2017 through 2040, with a total carrying value of nearly $5.7 billion and a total face value at maturity of nearly $8.9 billion. Of these 25 debt instruments, 24 are from the October 2008 refinancing and one debt instrument was issued on September 30, 2016.

From the budget or consolidated financial perspective, Chart 13 shows projected black lung expenditures (excluding interest) and excise tax collections for the period 2017-2040 in constant dollars. The significant assumptions used in the most recent set of projections, in constant dollars, are coal excise tax revenue estimates, the tax rate structure, the number of beneficiaries, life expectancy, federal civilian pay raises, medical cost inflation, the interest rate on new debt issued by the BLDTF, and the CPI-U for goods and services. The projected coal excise tax revenue estimates reflect, among other things, regulation pursuant to the Clean Power Plan, and future cash inflows from excise taxes have decreased significantly from those reported in prior years. The projections, in constant dollars for the open group, made over the 24-year period ending September 30, 2040, indicate that cash inflows from excise taxes will exceed cash outflows for benefit payments and administrative expenses for most of the years in the projection period. Cumulative net cash inflows are projected to reach $827.0 million by fiscal year 2040. However, when payments from the BLDTF’s maturing debt are applied against this surplus cash inflow, the BLDTF’s cash flow turns negative in all periods included in the projections. Net cash outflows after payments on maturing debt are projected to reach $8.1 billion by the end of fiscal year 2040, resulting in a projected deficit of nearly $10.95 billion at September 30, 2040.

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Source: Department of Labor

Table 9
Present Values of 24-Year Projections of Expenditures and Revenues for the Black Lung Disability Trust Fund

(in billions of present value dollars as of September 30, 2016)
Projected future expenditures 3.5
Projected future tax income 4.8
Net obligations from budget perspective (expenditures less income) (1.3)
Accumulated balance due General Fund 5.6
Net obligations from trust fund perspective 4.3

Note: Totals may not equal the sum of components due to rounding.
Source: Department of Labor

Table 9 shows present values of 24-year projections of expenditures and revenues for the Black Lung Disability Trust Fund computed as of September 30, 2016. Cash flows were discounted using a rate of 1.63 percent. From a governmentwide (budget) perspective, the present value of expenditures is expected to be less than the present value of income by $1.3 billion (a surplus). From a trust fund perspective, a large balance ($5.6 billion) is owed to the General Fund. From that perspective, when that accumulated balance is combined with the cash flow surplus, the program has a shortfall of $4.3 billion in present value dollars.

Unemployment Insurance

The Unemployment Insurance Program was created in 1935 to provide temporary partial wage replacement to workers who lost their jobs. The program is administered through a unique system of federal and state partnerships established in federal law but administered through conforming state laws by state agencies. The program includes the 50 states and Puerto Rico, U.S. Virgin Islands, and the District of Columbia. DOL interprets and enforces federal law requirements and provides broad policy guidance and program direction, while program details such as benefit eligibility, duration, and amount of benefits are established through individual state unemployment insurance statutes and administered through state unemployment insurance agencies.

The program is financed through the collection of federal and state unemployment taxes that are credited to the UTF and reported as federal tax revenue. The fund was established to account for the receipt, investment, and disbursement of unemployment taxes. Federal unemployment taxes are used to pay for federal and state administration of the Unemployment Insurance Program, veterans’ employment services, state employment services, and the federal share of extended unemployment insurance benefits. Federal unemployment taxes also are used to maintain a loan account within the UTF, from which insolvent state accounts may borrow funds to pay unemployment insurance benefits.

Chart 14 shows the projected cash contributions and expenditures over the next 10 years under expected economic conditions (described below) in constant dollars. The significant assumptions used in the projections include total unemployment rates, civilian labor force levels, percent of unemployed receiving benefits, total wages, distribution of benefit payments by state, state tax rate structures, state taxable wage bases, interest rates on UTF investments, and the Consumer Price Index for goods and services. These projections, excluding interest earnings, indicate a positive net cash flow in fiscal year 2017 through fiscal year 2026.

The Federal/State Extended Unemployment Compensation Act of 1970 provides for the extension of the duration of unemployment insurance benefits during periods of high unemployment to individuals who have exhausted their regular unemployment benefits. When the insured unemployment level within a state, or in some cases total unemployment, reaches certain specified levels, the state must extend benefit duration by 50 percent, up to a combined maximum of 39 weeks; certain states voluntarily extended the benefit duration up to a combined maximum of 46 weeks. These extended benefits are financed one-half by state unemployment taxes and one-half by federal unemployment taxes. However, the American Recovery and Reinvestment Act of 2009 (ARRA) began temporary 100 percent federal funding of extended benefits. Subsequent legislation, most recently P.L. No. 112-240, the American Taxpayer Relief Act of 2012, authorized continuing 100 percent federal funding of extended unemployment benefits to December 31, 2013.

During prolonged periods of high unemployment, Congress may authorize the payment of emergency unemployment benefits to supplement extended Unemployment Insurance (UI) benefit payments. Emergency benefits began in July 2008, authorized under the Supplemental Appropriations Act, 2008. This emergency program was temporarily extended and additionally funded by the ARRA of 2009 and has been subsequently modified several times, most recently by P.L. 112-240, the American Taxpayer Relief Act of 2012, which extended the emergency unemployment insurance program to January 1, 2014. Although the programs for emergency unemployment benefits and 100 percent federal funding of extended unemployment benefits expired in fiscal year 2014, the UI program continues to process residual transactions for benefit costs incurred prior to the programs’ expiration. Total cash inflows exceed total cash outflows in fiscal year 2017 and throughout the projection period. The net inflow (excluding interest) decreases from $12.6 billion in fiscal year 2017 to $11.2 billion in fiscal year 2018 and decreases from about $7.0 billion to less than $900 million between fiscal years 2019 and 2026. The net inflow is sustained primarily by the excess of federal tax collections over federal expenditures in fiscal years 2017 through 2023, and then primarily by interest on federal securities in fiscal years 2024 through 2026.

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Source: Department of Labor

Table 10 shows 10-year projections of revenues and expenditures for the Unemployment Insurance Program in constant dollars. Three sets of numbers are presented in order to show the effects of varying economic conditions as reflected in different assumptions about the unemployment rate. For expected economic conditions, the estimates are based on an unemployment rate of 4.68 percent during fiscal year 2017, and remaining between 4.60 percent and 4.80 percent thereafter. Under Sensitivity Analysis I which utilizes a higher unemployment rate of 5.83 percent beginning in fiscal year 2017, net cash inflows are negative in fiscal years 2017 through 2020, but become positive in fiscal year 2021, and continue to be positive through 2026. Under Sensitivity Analysis II, which utilizes a higher unemployment rate of 6.11 percent in fiscal year 2017, net cash outflows including interest earnings and expenses, are projected in fiscal years 2017 through 2022 by amounts between about $400 million and $35.0 billion, but outflows exceed inflows in fiscal years 2023 through 2026 by amounts between $2.8 billion and $12.0 billion. Net cash inflows are reestablished in fiscal year 2023 and peak in fiscal year 2025 with a drop in the unemployment rate to 8.30 percent in fiscal year 2020 and then steadily downward for fiscal years 2021 through 2026.

Each analysis uses an open group that includes current and future participants of the Unemployment Insurance Program. Table 10 shows the impact on the UTF projections of varying projected unemployment rates. For example, in Sensitivity Analysis II, while tax income is projected to increase as higher layoffs result in higher employer taxes, benefit outlays increase even more. From the Governmentwide (budget) perspective, under expected conditions, future cash income exceeds future expenditures by $51.5 billion. From the same perspective, under Sensitivity Analysis II, future cash expenditures exceed future income by $66.4 billion. From a trust fund perspective, which takes into account the $45.2 billion trust fund balance, the program has a surplus of $41.9 billion under the economic conditions for Sensitivity Analysis I.

Table 10
10-Year Projections of Expenditures and Revenues for Unemployment Insurance in Constant (or Inflation-Adjusted) Dollars Under Three Alternative Analyses for Economic Conditions

(In billions as of September 30, 2016)
Economic Conditions
  Expected Sensitivity Analysis I Sensitivity Analysis II
1Net obligations from the trust fund perspective equals net obligations from the budget perspective minus trust fund assets. The negative values in this line are indicative of surpluses.

Note: Totals may not equal the sum of components due to rounding.

Source: Department of Labor
Projected future expenditures
382.8
540.4
684.5
Projected future cash income
434.3
537.1
618.1
Net obligations from budget perspective (expenditures less income)
(51.5)
3.3
66.4
Trust fund assets
45.2
45.2
45.2
Net obligations from trust fund perspective1
(96.7)
(41.9)
21.2

Unemployment Trust Fund Solvency

Each state’s accumulated UTF net assets or reserve balance should provide a defined level of benefit payments over a defined period. To be minimally solvent, a state’s reserve balance should provide for one year’s projected benefit payment needs based on the highest levels of benefit payments experienced by the state over the last 20 years. A ratio of 1.0 or greater indicates a state is minimally solvent. States below this level are vulnerable to exhausting their funds in a recession. States exhausting their reserve balance borrow funds from the Federal Unemployment Account (FUA) to make benefit payments. In fiscal year 2016, there were no FUA borrowings, and in fiscal year 2015, the FUA repaid all its outstanding borrowings.

Chart 15 presents the state by state results of this analysis as of September 30, 2016. As the chart illustrates, 30 state funds plus the fund of the Virgin Islands were below the minimal solvency ratio of 1.0 at September 30, 2016.

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*State has outstanding Unemployment Insurance bond debt to private bondholders which is not included in its current trust fund balance solvency level.

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